$12 billion can get you the wrong kind of attention

Get comfortable and learn how an energy supplier got into trouble.

PJM, one of the largest utility companies in the United States, has found itself in a difficult position due to circumstances only partly of its own making. Numerous delays in new energy supplies, generally flawed planning and then sudden changes in supply and demand created $12 billion in new costs next year – costs that will be passed on to the 65 million people who rely on electricity. The sticker shock of this tariff increase is sure to attract attention, no matter how unclear a regulated monopoly may be.

This utility, PJM Interconnection, is a regional transmission organization (“RTO”) managed by a Limited Liability Corporation (“LLC”) operated by and for the utilities and power plant owners in 13 Mid-Atlantic states and is founded in the Ohio Valley. UCS is currently combating a series of $10 billion in annual power overruns with new strategies and allies because the barriers blocking supply cannot be solved by giving more money to existing power plant owners.

Licensed and accountable

PJM has real responsibilities (shared by each Federal Energy Regulatory Commission (FERC)-approved RTO), including transmission scheduling and processing new energy supplier requests in an interconnection queue. (This required queuing process determines the cost of connecting and injecting power from a new generator into the grid. This is a serious bottleneck everywhere. Here is a great blog by my colleague describing a region’s connection queuing.) Reliability is part these tasks. but that is more complicated. Trying to pay for reliability with a market is where this story gets interesting.

To bring this monopoly and cost increases to public scrutiny, UCS co-authored a legal complaint to FERC in the weeks following the announced cost increases. Our complaint challenged unwarranted and unreasonable rules in PJM’s capacity market that have already imposed $4 billion to $5 billion in excess costs to consumers in PJM’s most recent capacity auction – and more in three upcoming capacity auctions It could cost $12 billion to $15 billion unless the Commission calls for reforms. Let me explain.

What are we paying for?

PJM has a market-like process for qualifying and compensating power plants to meet electricity demand in a future year. This process is constantly being refined and sometimes presented with greater challenges due to complaints like ours with FERC. Last year, a series of rule changes to this “capacity market,” as well as a power plant owner’s decision to close two old power plants at the Port of Baltimore, set the stage for the 2024 auction to result in record-high prices. The supply available in the auction was intentionally limited by many factors under PJM’s control, resulting in the auction paying out 99.99% of the offered capacity. Since everything on offer was purchased and the clearance price depends on the most expensive resource selected, this limited offering resulted in a price that was almost ten times higher than in previous years. This is the proximate cause of the $12 billion in additional costs announced at the end of July.

UCS and other public interest organizations filed our complaint in September, which focused on a PJM practice that reduced the supply of power plants available for auction. We have adopted the policy that allows facilities paid for by PJM to remain open for reliability but are not included in this reliability auction process. (That’s like paying to repair your old car, keeping it running, and then buying a new car anyway.) Excluding these preserved plants essentially forces consumers to continue paying for the old plants while at the same time pay extra high prices for the immediate shortage that arises from not being counted. In a region where many aging facilities are on the verge of decommissioning, this one solution could save residents and businesses billions of dollars each year.

Our action was followed by consumer advocates from four states in the PJM region filing an additional complaint with FERC in mid-November, arguing that multiple policies led to this artificial supply shortage. They described that PJM grants exemptions to too many existing asset owners from staging supplies in the auction and is too slow in processing new supplies in the connection queue.

Since filing the complaint, co-sponsored by UCS, PJM has acknowledged that there are indeed problems with the auctions it runs and has agreed to postpone the next one. PJM is currently preparing some changes to the issues raised, including how to address reliability payments for delaying plant closures. In addition to these complaints, the PJM board also had to respond to letters from governors, members of Congress and state regulators demanding change. The only agency that gives instructions to PJM and to which PJM is slow to respond is FERC, its regulator.

FERC has long sought to increase competition among power plants, including to protect consumers from excessive tariffs, and PJM has long promised to facilitate that. However, the agreement is now strained as PJM tries to pay enough money to enough suppliers to ensure reliability in a time of new demands and new competition. Solar energy and solar-plus-storage are the biggest new contenders for the cheapest source of electricity in history, but PJM’s processing of connection requests from potential new suppliers has been delayed by four years or more. FERC made rule changes in 2018 with Orders 841 and 845 to allow for competition from storage and solar-plus-storage. These rules were intended to modernize the network, but were adopted and implemented inconsistently. Notably, PJM refused to keep pace with energy storage after once being a leader in recognizing storage value on the grid.

Recent conflict with regulators

FERC began new efforts in 2021 to remove barriers to interconnection and network planning. UCS and many advocates and industry stakeholders welcomed new scrutiny of poor practices. During this oversight process, PJM has raised objections multiple times, and now they are on the verge of not complying with these reforms that would increase competition and allow more supplies.

PJM continues to oppose a major change for energy storage pushed by UCS and adopted by other regions. PJM insists it must budget for new batteries or other energy storage to buy electricity when prices are high and supplies are tight, adding stress to the system rather than easing it. This “buy high, sell low” assumption presents batteries as a problem rather than a solution to meeting peak demand. In practice, this flawed philosophy forces battery projects to pay for expensive transmissions, defeating the purpose and value of building batteries where supplies are hard to come by, such as the port of Baltimore.

Where does this lead?

PJM doesn’t stand still. The organization and its members understand that there are problems with their supply forecast. By announcing the delay of the next auction, PJM has begun to address some concerns raised by UCS and consumer advocates. PJM hasn’t admitted much, but in meetings with stakeholders it describes measures that will spur some reforms. (PJM says it is planning changes so that a decommissioned port facility in Baltimore can still be counted for a while and other supplies can be drawn on, and perhaps storage has a place with solar and wind power, all with caveats and limitations . We will do that soon. See what they suggest.)

As PJM explains it, there isn’t much hope for energy storage or renewables, so they’re offering fossil fuel generation a four-year connection queue reduction. Well, maybe PJM wasn’t that clear, but that’s what they’re proposing. But science shows how wrong that assumption is – and that’s exactly why I’ve been advocating for years to bring PJM into the modern world and bring its policies in line with science to serve its tens of millions of ratepayers.

As I’ve said about PJM, “A mess this big takes time.” PJM says it needs to introduce several reforms to FERC now, with more to come. Let’s seize this opportunity and actually deliver a more modern, reliable and affordable network. The construction-ready clean energy and storage waiting in the queue should be our first choice.